Officially, the overdraft bank fee nightmare is almost over

The Federal Reserve announced on Thursday that starting July 1, 2010, financial institutions can no longer allow customers to overspend their account and then charge overdraft fees -- in most cases -- unless the customers have signed up for a bank's overdraft protection plan that includes such fees. My guess is, most won't.

As The Washington Post explains, the overdraft fee won't disappear entirely. Banks can still charge overdraft fees on checks or an automatic bill payment. But the days of buying a cup of coffee or stick of gum with your debit card without realizing you don't have the funds and then getting slammed with a $37.50 fee--that will end on July 1, 2010. Instead, you'll simply have your debit card declined. And if that thought truly embarrasses you, then tell your bank you want that overdraft protection.Plenty of critics -- including reader commentary on many of my posts about overdraft protection -- don't feel much sympathy for people who overextend themselves, and I understand that. But as someone who has occasionally been caught in the overdraft crossfire, I can only think, "Geez, it's about time..."

There are some perfectly logical reasons why people get into jams and find themselves in Overdraft Hell. For instance...

There's that stupid gas thing. As you probably already know, some gas stations don't immediately put through an entire charge. You can fill up your tank for $36, and later check your bank account and it shows a balance of $1. Days later, the actual $36 disappears. If you have a few gas fill ups with phantom charges like these and you aren't aware or forget that your available bank balance isn't what your bank says it is (and you're skirting the line as it is), it can wreck your account.

As we do our own online banking, we're more prone to making mistakes. I'm thinking of a friend of mine,one of the most financially responsible people I know, who recently was charged two overdraft fees, probably his first ever. As he told me in an email, "I made a mistake and inadvertently transferred money from my checking account to my money market instead of the reverse. That left my account with non-sufficient funds, and I was nailed with two overdraft fees. I immediately reversed the money market transaction when I discovered the problem, but since my money market is at a different institution, the transfer takes two business days plus an extra day for the funds to 'settle.' Because I knew that I was going to get nailed with more overdraft fees, then that necessitated my taking a cash advance on my Discover card..."

Debits are taken out of an account immediately; deposits take a while. This has bugged me more than anything. I can put a $1,000 check into my bank account on, say, a Thursday, but only $100 is available immediately. When I was younger, it took me awhile to grasp the fact that I shouldn't go to the grocery store and spend $105 on my debit card. In a fair and just world, banks would have put the deposits into the account at midnight, and then they would have let the debit card charges go through.

But no matter. The people who don't feel sympathy for those who get charged overdraft fees probably aren't going to approve or care about the Federal Reserve's decision. But those who have fallen into the overdraft trap will most likely be thrilled. Not that I believe banking, next July, will suddenly become a Utopian experience. After all, banks are a business, and they want to make their money. Some in the financial industry even think that a lot of people may wind up losing their accounts as the government tries to reign in bankers.

In fact, I received a press release today from Probity Financial Services -- I've written about them a few times for WalletPop, talking about how they have absolutely no overdraft fees, ever (but they do have a monthly maintenance fee of $19.95) -- and in the press release, the CEO, Tim Smith, made the prediction that if Congress limits the overdrafts that banks can lodge on customers, "there is a very real possibility that millions of consumers will be forced out of the banking system."

If that's the case, this is just the start of some new banking headaches. That said, I still think Americans are going to be better off without overdraft fees than with them.

Geoff Williams is a regular contributor at WalletPop and has frequently written about overdraft fees. Fittingly, he is the co-author of the upcoming book, Living Well with Bad Credit (HCI Books).